Trading securities, such as currencies, commodities, or stocks using, for example, an online brokerage, involves providing security-specific information, such as in the case of stocks, the ticker symbol, number of shares to trade, and the order type. The order type determines the way the trade is executed. If the order type is set to market, the trade is executed at the first opportunity at the currently available price. However, many investors set the order type to limit. In this case, the trade is executed when and only when the price of the stock reaches a value specified by the investor. For example, at the time of the order placement, the price per share for the stock in question is $32. If an investor wants to sell some shares, she may set the limit price to $32.50, and may specify the time for execution “till end of day”. The sale takes place only if the stock price reaches $32.50 or more anytime during the remainder of the trading day. If the stock price remains below the limit, the order is automatically canceled at the end of the day. Similar rules apply to buy orders. Thus an investor choosing to place a purchase limit order may not receive execution if the price rises, but will receive execution if the price falls sufficiently. The investor misses some of the gains and suffers more of the losses. Optimally placed limit orders may provide superior returns by reducing the costs of execution. Limit order trading involves the risk of non-execution but also offers the promise of superior returns.
Limit price orders have obvious advantages of yielding better prices and protecting investors from undesirable effects of volatility in the market price. However, this advantage comes at a cost of losing some control over the order, as the order may never execute. The investor must balance her desire to obtain a better price with a need to ensure reasonable chances of executing the order. Some securities are more volatile, and there is more chance that the share price will deviate from the current market price to reach the limit set by the investor. Other securities are less volatile, and the limit price must be set closer to the current market price if the investor wants the trade to be executed within a specified timeframe (e.g., by the end of the day or within a week).
Thus, there is a need to provide investors with a means to optimize prices on selling and buying securities and specifically a method to estimate the probability of executing limit orders, and to assist with making informed decisions on balancing the associated risk and return.